The Free Market 14, no. 4 (April 1996)
There it is, on the cover of Newsweek, in thick, blood-red letters: “Corporate Killers.” What follows is mug-like photo after photo, some of them grainy, of rich white men, all menacing and “greedy.” They are the CEOs of America’s top corporations. The story’s thesis is simple: they are destroying the country.
No time to discuss economic theory. Don’t talk about taxes, spending, regulations, quotas, or government intervention in the labor market. These villains have cut their payrolls and downsized their companies. And just look: their salaries are in the millions. At last, we’ve caught the criminals. Line them up against the wall. Ready, aim, fire.
It’s enough to make the blood of any free enterpriser run cold. Anti-capitalism is loose on the land, with the media, the government, and the political class leading the charge. What’s under assault here is not these particular men (although they’d best be careful with unmarked packages) but the system of profit and loss itself.
These talented managers, whose job it is to insure that their companies serve stockholders and consumers, are helping coordinate the production and consumption decisions of millions of people. It takes great skill in entrepreneurial insight to know how many and which people to let go.
For this, the men are charged with ruining people’s lives in the pursuit of efficiency. Profits are not signs of business success, but greed, and proof that companies are bloodsuckers, stealing the surplus value from workers, as Marx used to say.
The people who scream murder over corporate layoffs are also the people who complain that businesses shouldn’t be that big in the first place. Why then aren’t CEOs not praised for downsizing oversized companies? Why aren’t they praised for not wasting resources keeping mid-level managers employed even though they drag the company down?
The crucial question is: who or what is supposed to determine how many people ought to work for any particular company? The question is pertinent because under either a planned or free economy, corporations are not free to be as big or as small as their stockholders and CEOs desire. That decision is made for them outside the boardroom, either by the government or by the consuming public through their free choices of goods and services.
If government is going to determine how many workers each company ought to have, it will make the wrong decisions and impose massive distortions and misallocations. People will hang around in unproductive jobs and for no socially useful purpose, just as government bureaucrats do today.
Under this system, it is inevitably that workers will not be free to choose a job or occupation of their liking. Any restrictions on the right of business to determine the composition of its own labor forces also means lost opportunities for workers to find productive jobs to their liking.
In a free market, Mises never tired of reminding us, the consumer is king. If consumers choose other products besides IBM on grounds of quality and price, the value of IBM stock begins to fall. At this point, IBM can either compete by cutting costs, including its labor costs, or it can waste resources and drive itself into bankruptcy, and eventually fire all its workers.
People who are laid off aren’t thereby pushed into the Gulag. They are back into the market and are sought by others for their skill and experience. Other companies compete for attracting new employees. The pool of labor shifts, consumers get their way, inefficiencies are lessened, and everyone is better off than before. The company’s stock value improves, but the demagogues complain about that too.
Another way to look at layoffs in a free market is that they signal an increase in productivity. As David Laband and John Wells have pointed out, in 1900, 40% of all workers were engaged in agriculture; today 3% are. The market reallocated labor resources to reflect vast increases in wealth.
Of course we don’t live in a free market and government has radically altered the landscape. Since the New Deal and wartime wage controls, benefits like health insurance and unemployment insurance have been substituted in part for workers’ wages and incomes.
In the last five years—with the onset of “family leave” and higher health insurance premiums—these labor costs have zoomed. These mandated benefits have not only driven wages and incomes down. They have vastly increased the costs of keeping people on the payroll and the risk of putting them there in the first place.
There are also hidden costs. The Americans With Disabilities Act, and all the associated civil rights laws, have meant that any employee with a grievance can extract vast quantities of wealth from a company, either through demanding special privileges or imposing high legal costs.
Look at the explosion in the temporary employment industry. It’s a measure of the costs of full-time employment to every business. It used to be just secretaries who were hired as temps. Now it’s engineers, physicists, lawyers, and floor managers. The reason? Because of government-imposed inefficiencies, temps cost a company less in overall wages, benefits, and lawsuit risk.
Like Hillary’s health care crisis, this media-driven layoff scare is mostly a setup. The problem is not layoffs as such; unemployment is low (for now) and people are finding new jobs after layoffs. The real trouble is finding jobs at similar status and wages. For two and three income families already falling behind, the inability to do this can lead to panic.
Some European countries faced with much worse layoffs and a much larger temp sector have restricted the right of business to fire people (meaning they don’t hire people either) and their ability to move out of the country (thereby relieving pressure on the oppressing government). They have even instituted exchange controls, a sure sign of tyranny. Is that where we are headed?
Perhaps, unless politicians and the media get some economic education, and fast. But Allan Sloan, the author of the Newsweek bromide, displays no apparent interest in economic analysis. In this he mirrors the general ignorance of the national political class.
In a version of the hip campaign doctrine, Sloan theorizes that CEOs are trying to obtain “bragging rights” on Wall Street; the more layoffs, the more they are beloved. “No one in CEO-land seems to care” about the workers. “Greedheads” make “human sacrifices to Mammon, god of Wall Street,” and Wall Street thanks them by “spitting on the victims’ bodies.”
Yet are stockholders greedy for wanting to sell falling stocks and buy rising ones? Are consumers to be condemned for wanting the best products and services at the best price? Not at all. They are merely acting according to price signals, and helping to coordinate the market economy.
A main benefit of the free market, in fact, is that it restrains the effects of greed by channeling it into socially useful, i.e. non-governmental, purposes. Through the careful calculation and cooperation of consumers, stockholders, CEOs, and workers, the whole society is made better off.
The heads of America’s corporations are not saints. We by and large live in a corporate state, where producers design rules for their industry to keep out competition and enlist the government to do their dirty work. But killers and butchers? This kind of rhetoric endangers free enterprise itself.
When layoffs occur, it is the right and proper market response to prior interventionistic realities. By responding to the desires of consumers, CEOs are inadvertent heroes of free enterprise, prosperity, and economic liberty.
If we want a police lineup of prosperity’s real butchers, let’s start with pictures of the Clinton Cabinet. Don’t leave out their salaries and perks, and the amount of wealth they destroy every day.
